The Long-Awaited Return of the Retail Investor?

"We believe that according the name 'investors' to institutions that trade actively is like calling someone who repeatedly engages in one-night stands a 'romantic.'"-- Warren Buffett

For the last four years, the market has been dominated by actively trading institutions. So it is very nice to see that, for a change, the current market rally appears to have a good amount of retail participation. Ever since the market bottom in March 2009, we've seen a steady withdraw of funds by individual investors, even though the market trended steadily upward.

The cheap money supplied by the Federal Reserve to institutions, which had no place to go but into the market, more than offset the exodus of the individual investor. However, it also changed market dynamics and the way in which the market traded. Instead of excitement and growing optimism when stocks trended upward, we saw these joyless, one-way moves that both bears and bulls seemed to hate. The normal human emotions that accompanied a strong market just didn't seem to exist any longer.

The ebb and flow of prices of which traders could take advantage just didn't exist like it used to. We'd have times when everything was highly correlated and moved with the indices, and then there would be times when we saw arbitrary movement that made little sense. Some of the traditional technical analysis on which we'd relied simply didn't work anymore. A good example of this is the tendency of the market to make V-shaped moves on steadily declining volume. It isn't a logical pattern, but it has occurred on a regular basis.

To me, the lack of individual investors and the illogic of the price movement has been one of the worst aspects of the market since the great meltdown in 2008 and 2009. The individual investor has not participated and, as a result, the trading has often felt manipulated and artificial. The market has been driven more by computers and big macroeconomic-focused funds, while the excitement over trading individual stocks has died out.

Lately we have had seen a number of headlines announcing the sudden jump in inflows from individual investors. According to reports, a record $55 billion has flowed into the market. That surpasses even the numbers hit back in the bubble days of 2000. Maybe this is just a seasonal aberration after years of outflows, but if it is a building trend, it is very good news for the market. If the individual investor is coming back, that bodes well not only for trading, but for the overall economy.

We shall see how that develops, but the more immediate issue now is whether the major indices can continue this very lopsided trend. We are getting to the point now where even the bulls are starting to hope for some rest, because it is becoming so hard to put money to work when stocks keep running straight up.

My advice for a while now -- I have to brag a bit and say it that has worked well -- is to stick with the trend. Again, don't become caught up in the top-calling game that so many gurus embrace. You are better off simply reacting when conditions change, rather than trying to guess when a top has occurred. There have been innumerable top-callers lately, and they have all been dead wrong.

The time to start worrying about this market a bit more is when we see intraday reversals and when we see weak finishes. That just hasn't happened lately. We have barely seen even a soft close so far this year, and early weakness has been consistently bought. The key to determining when market character is shifting is to watch for when these patterns start to turn.

We have a quiet start to the week. I see quite a few downgrades this morning, and even poor Apple's (AAPL) rating is being cut again. It is easy to worry if you want, but it is better to let the price action be your guide.

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